Retirement planning is one of the most important aspects of financial planning and yet one of the most neglected ones. The importance of being adequately funded to continue to lead your current lifestyle post retirement cannot be stressed enough. So how does one begin with retirement planning? A clear understanding of your retirement needs is the first step towards retirement planning. This is a task in itself. Considering the fact that retirement is a distant life event, how does one fully and accurately measure financial needs 20 – 30 years hence? We’ll discuss retirement planning in greater detail here.
Here are some points to consider to help understand the need and urgency for retirement planning:
i. Life Expectancy: Globally, life expectancy is on the rise owing to better access to healthcare, improvements in medical science, access to clean drinking water, etc. It is the case in India as well. Life expectancy in India is expected to increase to over 75 years by 2050 from the current level of ~65 years. Now, that’s good news. However, it can turn into a nightmare if you have not planned for it adequately. In other words, it is not a great situation to be in if you outlive your retirement kitty.
ii. Absence of a strong social security system: Unlike in many developed countries, India lacks a strong social security system to adequately provide for your post retirement needs. While we have a mandatory Public Provident Fund (PPF) system or Employee Provident Fund (EPF) – with contribution made by the employee and a matching contribution made by the employer – it is unlikely to be sufficient to cover your post-retirement requirements. Also, many people tend to withdraw their PF each time they switch their jobs. Further, less than 10% of India’s working population has access to PF. Self-employed individuals, employees in the unorganized sector, professionals such as CAs, Doctors, lawyers, etc., do not have access to a retirement corpus such as PF.
iii. Inflation: Inflation not only erodes the present value of your money, it also significantly reduces your purchasing power at current rates. Therefore, if your annual expenditure stands at a certain sum today, you will require many times that amount to be able to meet your commitments several years hence – assuming you have not added other heads to your expense list at the time.
iv. Miscellaneous Expenses: Key life-events such as children’s education, children’s marriage, etc tend to eat into your retirement kitty if you have not planned for those requirements adequately. This further erodes your retirement corpus. And since retirement is a distant event, you might tend to postpone planning for the same.
v. Wish to retire early: With multinationals setting shop in India, a fast-paced work culture, and other factors have added to work pressure, many young working professionals have this desire to retire early to pursue their other desires, hobbies, etc. While this is a liberating and an enabling decision to make, you will have to plan for the same adequately at least 20 years prior to the event – given the above aspects and other factors.
Now that we have taken a close look at the need for retirement planning , lets also understand how making an early retirement plan and staying invested for long makes a significant difference to your retirement corpus.
The simplest approach to calculate your retirement corpus is to arrive at your monthly/annual expenses at the time of your planned retirement year. If you are planning your retirement twenty years hence, arrive at the inflation factored expense requirement two decades hence. Then multiply that number with the number of years you expect to live – based on the average life expectancy – this will help you determine your retirement corpus. If your current monthly expense is Rs.50,000, at an inflation rate of 7% per annum, you will require Rs.180,000 twenty years hence as monthly expense.
Planning for your retirement early in life helps build a large corpus regardless of how small a saving you set aside for this purpose. This is achieved by the power of compounding backed by a greater number of years that has gone behind your retirement planning.
Retirement planning is an important financial decision. You will have to be meticulous with planning the same. Retirement years are meant to be golden years where you can cherish the evening of your life with loved ones doing things you love the most. Don’t let your finances interrupt your retirement plans.